Jumbo Surges, But Its Future Is Still Unclear
Even though it still has some regulatory hurdles to clear, interest in jumbo lending has bumped up a notch.
“The market is more competitive,” said Tom Wind, executive vice president, home lending, at national lender EverBank. He said there has been “strong” origination of jumbos, which the bank considers one of its “core” products, in the company’s correspondent and retail channels.
Lenders funded almost $32 billion worth of residential jumbo loans in the second quarter, according to data released by ON and its Quarterly Data Report affiliate last month. During the same quarter a year ago, they were just under $18 billion.
And recently a securitizer that has been poised for some time to participate in the secondary market for the product had officially filed a shelf registration to issue jumbo securities.
Shellpoint Partners, which has ties to mortgage-backed securities market pioneer Lew Ranieri, filed the nonagency MBS shelf registration. The company said would be used at least initially to only securitize jumbos originated by its New Penn Financial unit, which originates through multiple loan channels, including wholesale and correspondent.
Since the downturn, the nonbank secondary market for securitized jumbos has been largely limited to a single consistent player, Sequoia/Redwood, a real estate investment trust.
Jumbo has been “almost dormant,” with some companies even pulling back from it, said John Walsh, president of nonbank Total Mortgage Services, a Connecticut-based lender licensed in 27 states. But now, he said, “We’re starting to see some traction there.”
Walsh said that consumer demand has picked up and jumbo rates have gotten much closer to conforming rates.
“The product has opened up,” said Amy Tierce, a branch manager and regional vice president in the metropolitan Boston area, in a separate interview.
Tierce said the secondary market for the product, a key one for the high-cost area her branch serves, had seen a “pretty pronounced shutdown,” but has improved recently.
She said while the New England decline started earlier in the cycle than some other markets and as a result its recovery may be occurring relatively sooner, she says that based on what she hears, she believes markets are “more positive across the country.”
Tierce said recently some local/regional lenders have shown some more interest in the product, something Walsh said he also has seen. She said national lenders also have been more competitive.
When asked about potential regulatory hurdles that could affect the market as new rules take shape, Walsh acknowledged that there is “certainly some uncertainty” there.
“There are certainly some things that can upset the market,” he said.
Asked about how pending rules might affect the jumbo market in a separate interview, Wind said, “regulation’s always a concern for the business overall.
“There is always the risk that the way 'qualified mortgage’ or 'qualified residential mortgage’ is defined could limit options,” he added. “We would like to think the right things are going to happen, but it is still uncertainty, and we need to get some definition there.”
In the mean time, Tierce finds “underwriting still remains pretty rigid” in the jumbo sector. Meeting the qualifications for jumbos, particularly the strict 80% loan-to-value ratio requirement, can be a challenge, but “we’re getting them done,” she said.
Mortgage insurers are willing to provide coverage that allows for the 90% loan-to-value ratios, but executives said as of the time they were respectively interviewed they had not seen it widely used in the market. Origination of 90 LTV jumbos with MI “has not happened to date in any kind of broad way,” said Wind.
“I would love to see lenders lose their fears about doing 90s with mortgage insurance,” Tierce said.
But Wind said he feels underwriting guidelines are likely to remain consistent unless there is a change in market conditions that truly warrants it, something his company is constantly evaluating.
“The new reality is it is a higher credit standard than existed before,” he said.
One way that banks that can portfolio the product may be more flexible than conduits, which typically look for more standardized loans conducive to securitization, is loan size, added Wind, when asked about his company’s loan amounts. He said these generally are fairly standard, but that his company does allow for higher sizes when borrowers have the income and assets to qualify.
Ultimately, whether the recent surge in jumbo truly marks the long-awaited reopening of this market remains to be seen.
New entrants the apparent rebound draws could face operational challenges, said Henry Santos, senior executive, at Accenture Credit Services.
Santos said it may be tough to find the senior underwriting talent needed to analyze the borrowers in this market. Another challenge may lie in the need to adapt or obtain the automation and capacity needed to process these particular loans in line with market demand. He said there could be some possible outsourcing and fulfillment demand as a result